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Will AT&T Suffer if its Merger with DirecTV is Denied?

Recently, The CEO's of AT&T and DirecTV claimed that the only way they can remain competitive in the telecom industry is if their merger plans are approved. Is there truth to their claims, or are the execs just doing whatever they can to get their merger approved by the FCC?

On Tuesday, June 24, 2014, Michael White, CEO of DirecTV (NYSE:DTV.DL), and Randall Stephenson, CEO of AT&T (NYSE:T), went before congress to discuss the benefits of their merger plans.

The CEO's claimed that merging their companies is the only way to preserve competition if Time Warner Cable(UNKNOWN:TWC.DL) and Comcast(NASDAQ:CMCSA) are allowed to join forces.

Were the executives just blowing smoke, or is the AT&T-DirecTV merger truly essential for competition in the telecom market if TimeWarner Cable and Comcast's merger is approved?

What the pay-TV industry will look like if Comcast & Time Warner Cable mergeFirst let's imagine Comcast and Time Warner Cable are the only two companies in the telecom industry that are approved to merge. Now let's look at pre-merger and post-merger pie graphs of the market share of the largest pay-TV companies:

According to DirecTV's annual report from 2013, there were 100 million pay-TV households in the U.S. If Comcast mergers with Time Warner Cable, the resulting company would have nearly 34 million cable customers. That would mean over one third of the Pay-TV households in the United States would use Comcast as their service provider.

Now let's take a look at a before-merger and after-merger snapshot of the Internet service providing market:

After the merger, Comcast would have over 32 million Internet subscribers. The new Comcast would serve about 32 million of the 98 million Internet-using households in America.

The market power of the new Comcast could help the company gain even more subscribers. There is no telling powerful the new Comcast could become.

So exactly how would this Affect AT&T's competitiveness?Comcast and Time Warner Cable have created an advertisement campaign to get the general public to support their proposed merger:

The image above is from Comcast's corporate website

As you can see from the advertisement above, the companies are touting that the merger will result in faster Internet, a more reliable network, lower Internet costs for the consumer, and more TV channels for its customers.

If the merger does everything the two companies claim it will, consumer preferences could shift dramatically. Currently Comcast and Time Warner Cable are two of the lowest-rated Internet service providers in the United States. If the merger is approved, the company could improve its service quality and win back a significant number of subscribers previously lost to AT&T. This would result in lowered revenue and subsequently lower profits for AT&T.

If AT&T can merge with DirecTV, then it would have a fighting chance against post-merger Comcast. If Comcast's merger is allowed and AT&T's is not, AT&T's competitiveness and ability to generate value for its shareholders may suffer substantially.

What's the bottom line in all of thisIf the FCC allows Comcast to merge with Time Warner Cable, then it should allow other companies to merge as well. The competitive advantage of a combination of Comcast and Time Warner Cable result in a monopoly comparable to the pre-1984 Bell System.

It seems like the CEO's weren't blowing smoke after all. If AT&T's merger isn't approved and Comcast's is, AT&T will definitely lose its ability to compete with Comcast.

Author

Michael is a full-time MBA student and certified stock market junkie. For the Fool, he writes articles about the telecom industry.
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